Hayek: The Road to Stockholm

...Not that he has set out to design free markets, for example, or the natural law that pre-dates legislatures...

...Rather, he has evolved them...

...Ever scrupulous to acknowledge an intellectual debt, Hayek wrote that the Wicksell-Mises theory of interest-rate divergence already offered "the most important elements" of an explanation of the trade cycle...

...Hayek, incidentally, has dismissed his Road to Serfdom, a popular treatment of the dangers of centralized economic planning, as no more than an "incidental byproduct" of this long-range plan of study...

...The Royal Swedish Academy of Sciences, in October, conferred the 1974 Nobel Prize in economics jointly upon Gunnar Myrdal and Friedrich A. Hayek...

...The "spirit of the gentleman and of religion," the cornerstone of a traditionalist society, is nowhere present here...

...Inflation mounts, as "created" purchasing power courses through the economy...

...Contemporary criticism of Hayek's major theoretical work—Prices and Production (1931...

...A now-standard study by Milton Friedman and Anna Schwartz (Monetary History of the United States) shows that, on the contrary, the Federal Reserve actually aided in contracting the United States' money stock—by a third between 1929 and 1933—and that the contraction was disastrous...

...Hayek focuses his "tolerably clear picture" of a free society more sharply in his latest book, Rules and Order (1973...

...With certain nineteenth-century historians of the law in mind," he continued, "Dean Pound voices the legitimate complaint that they will not 'hear of an element of creative activity of men as lawmakers, judges, writers of books, or legislators...

...Surely, even the common law was no "mere anonymous tradition," Edward S. Corwin wrote...

...The second is the "natural rate," which—to quote Hayek—is that rate "at which the demand for loan capital just equals the supply of savings...

...Politically, Hayek swam against the stream...

...Hayek edited, in 1933, a German translation of an early Myrdal study on monetary theory, "Monetary Equilibrium...

...Writing last November in the New York Times, Hayek warned that inflation presents a graver threat than unemployment...

...Nor should we try to direct them, he argues...

...One is the money rate, which depends on the amount of money bankers have to lend, on the one hand, and the demand for loans, on the other...

...In noting the economists' contradictory views, the Wall Street Journal praised the judges' liberality...

...True, Hayek was skeptical then, as now, of government economic interventionism...

...Acting on their own, armed with knowledge (mundane, certainly, but no less important for that) available only to them, free men direct society unconsciously...

...Hayek and Myrdal, it has implicitly acknowledged that the important questions about man and his government remain unsettled...

...Note that the money rate and the natural rate need not be equal...

...Road to Serfdom stands as one of the mosteloquent statements of libertarian principle ever written...

...But at no time have their differences come more vividly to light than in the interviews that followed the Academy's Nobel selections in October...

...that "reason" will not always get us where we want to go...

...In Monetary Theory and the Trade Cycle, for example, he charged that American monetary authorities had sought repeatedly to cure the depression by a policy of credit expansion—"with the result that [it] has lasted longer and has become more severe than any preceding one...

...and The Pure Theory of Capital—was spirited, though not uniformly enthusiastic...

...It was only through a re-examination of the age-old concept of freedom under the law, the basic assumption of traditional liberalism, and of the philosophy of the law which this raises, that I have reached what seems to me to be a tolerably clear picture of the spontaneous order of which liberal economists have so long been talking...

...Notwithstanding, the book was an immediate cause cMbre, inspiring one Herman Finer to concoct a rebuttal titled Road to Reaction (1945...

...His defense of what the past has wrought is not the defense of prescription, however...

...Road to Reaction symbolizes the frenzied resistance that such ideas must surmount...

...to allow a long inflationary boom to bring about a misdirection of labor and other resources into employments that can be maintained only so long as inflation exceeds expectations...

...The complexity of society and the blurring pace of change demand flexibility...

...But it has, of course, been as little invented by any one mind as language or money or most of the practices and conventions on which social life rests...

...One probably does not—it is enough, to understand that some arose more spontaneously than others...

...Myrdal, one of the architects of the Swedish Labor Party's welfare state, is an avowed socialist...

...With this essay, he has written, "I was led into all kinds of questions usually regarded as philosophical...

...Like other members of the "Austrian" school, notably Ludwig von Mises, Hayek emphasized the influence of money on ratios of exchange...

...Myrdal, speaking to reporters in New York, called for gasoline rationing and a return to wage-price controls—"a aptly ernment program with teeth," as he aptly described it...

...For the so-called events of legal history are in truth acts of definite men, or even of a definite man.' " How, then, does one attest to the virgin birth of institutions...

...Hayek as Philosopher As Hayek grew older, he became less preoccupied with the pure theory of economics...

...By the end of the 1930s, Hayek and Myrdal had begun to turn away from pure economics to broader social questions, and there they parted ways...

...But what of the New York Stock Exchange, which for nearly two hundred-years has required itsmembers to fix brokerage commissions...

...His faith, a faith in facts, admits little doubt, and certainly none on the subject of man, his government and the economy...

...What we have inherited—markets, law, and morals, for example—clears the way for still more progress and, perhaps someday, utopia...

...Hayek, visiting professor this year at the University of Salzburg in his native Austria, is one of the free market's principal champions...

...With it, the rate of interest—the measure of the usefulness of capital—is not determined strictly by the demand for investment and the supply of savings...

...Tradition, history, and custom grew suspect under their sway: "Morals, religion and law, language and writing, money and the market, were thought of as being deliberately constructed by somebody, or at least owing whatever perfection they possessed to such design," Hayek writes...

...Rules and Order, nonetheless, rests on distinctions that traditionalists have long defended: first, between a "grown" order, that which man has evolved despite kings and committees, and an organization, which he has created with specific ends in view (the difference, for example, between markets and the Federal Trade Commission...

...Bank lending, Wicksell believed, distorts the equality between savings and investment that would naturally prevail in a barter economy...

...was] later described by Adam Fergusonas 'the result of human action but not of human design.' " Rules and Order draws heavily on Hayek's thirty-five years of philosophical work...

...After a fashion, man has provided this flexibility for himself...

...Chief among these, of course, was Keynes and his General Theory...

...To be sure, both men are accomplished technicians...

...Hayek, declaring that "all major crises have been caused by inflation," spoke of the dangers of government intervention and warned that permanent remedies would require "some substantial unemployment...

...Now, should we let spontaneity run its course—if the exchange has indeed evolved spontaneously—or outlaw tradition in the name of free-market theory...

...The problem with this argument, so prevalent in Hayek's writing, is practical...

...In Constitution of Liberty, Hayek described the "traditional doctrine of liberal constitutionalism...

...Planning will not work, because no man, no group of men, can grasp the intricacies of economic life...

...The distinction between that which man has evolved spontaneously—for no purpose except general usefulness—and that which he has fashioned outright, to serve a concrete social goal, is crucial, Hayek writes...

...New research, not surprisingly, has overtaken some of Hayek's work...

...So, too, with Hayek: one thinks of him first as a philosopher rather than an economist, the author of The Constitution of Liberty (1960) and The Road to Serfdom (1944) instead of The Pure Theory of Capital (1941...

...And yet, wrote Schumpeter, "the much greater success of Keynes's General Theory is not comparable because, whatever its merit as a piece of analysis may be, there cannot be any doubt that it owed its victorious career primarily to the fact that itsargument implemented some of the strongest political preferences of a large number of economists...

...Hayek believes in markets because he believes in human ignorance, the hopeless diffusion of economic knowledge among individuals...

...Prosperity fueled by cheap money tends to enlarge the economy's capital stock unduly, causing an inevitable cyclical downturn...

...In Constitution of Liberty, Hayek wrote in identical terms of the law—the set of generalized rules of conduct that "tend to develop from unconscious habits into explicit and articulated statements and at the same time to become more practical and general...

...The mischief of naive rationalism, the hubris of reason, Hayek lays principally to two seventeenth-century philosophers, Rent Descartes and Thomas Hobbes...

...All institutions of freedom are adaptions to this fundamental fact of ignorance, adapted to deal with chances and probabilities, not certainty...

...Quoting Schumpeter, Hayek writes, "the economic life of a non-socialist society consists of millions of relations or flows between individual firms and households...

...Profits, Interest and Investment (1939...

...If it had been deliberately designed," he continued, "it would deserve to rank among the greatest human inventions...

...What of antitrust law and corporate regulation, for example...

...Monetary Theory and the Trade Cycle...

...It was these distinctions that W.E.H...

...In Hayek's eyes, no question ever yielded more readily to analysis, nor suffered more acutelybefore sophistry...

...Yet these uncoordinated actions are the lifeblood of progress...

...Our troubles are not those of "capitalism," he said, but rather of faulty fiscal and monetary management...

...Nor is it the apotheosis of a simpler day...

...In effect what the Royal Swedish Academy has done is to bestow its high honor upon a scholar who has spent the better part of his life arguing against the very collectivist trends toward which the academy is thought to be in sympathy," the paper said of Hayek...

...Rarely have two men agreed on less...

...Hayek, Finer charged, had mounted "the most sinister offensive against democracy to emerge from a democratic country for many decades...

...Hayek traces his break from technical economics to an essay he wrote in 1936, titled "Economics and Knowledge...

...Hayek has steadily advanced this understanding...

...in the third volume of a scheduled trilogy (of which Rules and Order is the first—and so far the only—installment), he aims to propose some "institutional invention" to salvage matters...

...On being presented to the Anglo-American community of economists, [Hayek's ideas] met with a sweeping success that has never been equalled by any strictly theoretical book that failed to make amends for its rigors by including plans or policy recommendations or to make contact in other ways with its readers' loves or hates...

...Hayek as Economist As graduate students, both Hayek and Myrdal shared the guiding influence of Knut Wicksell (1851-1926), a Swedish economist who saw in the divergence of interest rates an important cause of the business cycle...

...Money, in the borrower's judgment, is relatively cheap...

...There arises a problem of definition...

...For if someone "made" markets, then someone must govern them...

...Not until the eighteenth century did thinkers like Bernard Mandeville and David Hume make it clear that there existed a category of phenomena which...

...that to succumb to coercion's short-term stability is to mortgage the adaptive powers of freedom...

...A "true rationalism," Hayek writes, takes account of what man makes almost in spite of himself, while a "naive rationalism" ignores all but man's conscious achievements...

...But for now, Hayek writes of the just application of reason to human affairs...

...Joseph A. Schumpeter, writing ten years later, was more favorable...

...It was Hayek's view, of course, that economic planning of any stripe invests government with powers that unfailingly smother liberty...

...How do we know spontaneity when we see it...

...The publication, in 1944, of An American Dilemma and The Road to Serfdom undid what political mysteries lurked in the two men's thought...

...He has charted the shoals of planning and bid us sail to freedom's deeper waters...

...In the United States Myrdal's fame rests less on economic theory than upon his landmark study of race, An American Dilemma: The Negro Problem and Modern Democracy (1944...

...It had been by no means evident before then—at least, not to readers of their economic tracts—what politics the two men might secretly have harbored...

...Money complicates matters...

...Granted that the market, in its broadest sense, was evolved and not decreed...

...In short, we have distorted the structure of production...

...Businessmen build more factories, buy more equipment, than society can immediately employ...

...But if a villain was to be found in the dusty pages of his Monetary Theory and the Trade Cycle (1933), it was the ogre of an inflationary banking system...

...The essay, weightier than its 184 pages might suggest, both reunites familiar Hayekian themes (the rule of law, the wonder of the market) and marks a turn in the author's thinking...

...Together with Ludwig von Mises, he has shown us anew the genius of markets...

...The choice does little to quiet the heresy that economists despise consensus...

...If the two can be said to share anything—apart from prize money totalling $123,000—it is a love for scholarship, boundless energy, and learning that spans the social sciences...

...But the importance of money is not that it affects the overall level of prices, Hayek said...

...It is unlikely that Hayek, decorous yet firm at seventy-six, would agree with the Journal's conclusion...

...I am convinced," he wrote of the price system in Individualism and the Economic Order (1948), "that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been proclaimed as one of the greatest triumphs of the human mind...

...Fittingly, therefore, he begins with the tenet of human ignorance —ignorance, that is, at the top...

...They think of the phenomena of legal development as events, as if men were not acting in the bringing about of every one of them...

...Each toiled during the Great Depression on questions of money, interest rates, and the business cycle, and though they worked independently their paths often crossed...

...Liberty is a practical virtue...

...It is to the credit of the academy that, in honoring Drs...

...Myrdal, however, was critical of both Hayek and Keynes for not taking proper account of risk and the anticipation of change in business...

...Six years later, in an English edition of the same essay, Myrdal praised Hayek's analysis of production, saying that in its treatment of "roundabout" or capital-intensive processes of production, Hayek's work outshone that of another rising theorist, John Maynard Keynes...

...Whatever the critical preoccupations of the 1930s, it is clear that Hayek's ideas rose upward from his forebears' foundation...

...And if legislatures enacted all law, then they may alter any law...

...Liberty is essential in order to leave room for the [unexpected]," he wrote in The Constitution of Liberty...

...Lecky had in mind, perhaps, when he described the salient error of conservatism as stupidity and that of liberalism as folly...

...Economics, a science less dismal than disputatious, was honored last year in a manner uniquely suited to the times...

...What we have done is to represent on a colossal scale what in the past produced the recurring cycles of booms and depressions...

...A second distinction is that between the purpose-free law of liberty, laws that apply universally, with no aim but to serve justice, and the purposeful rules of legislators—those that direct people and institutions toward -fixed social goals...

...If indignant reformers still complain of the chaos of economic affairs, insinuating a complete absence of order, this is partly because they cannot conceive of an order which is not deliberately made, and partly because to them an order means something aiming at concrete purposes which is, as we shall see, what a spontaneous order cannot do...

...Constitutions, the Enlightenment's attempt to secure liberty through limited government, have failed, he asserts...

...The turn is a pessimistic one...

...It is the balance among relative prices that demi-- mines the productive mix of capital and labor...

...Hayek, they said, appeared to believe that if money were held neutral, "the disturbances which continually arise from the side of real phenomena"—errors in business judgment, for example—might somehow be overcome...

...A strong critical reaction followed that, at first, but served to underline its success, and then the profession turned away to other leaders and interests...

...The rate of interest, in other words, is artificially low, and it stimulates investment that the supply of savings alone, uninflated by bank credit, could not support...

...We can establish certain theorems about them, but we can never observe them all...

...Rarely has a Nobel Prize been better deserved...

...the structure of production becomes distorted and ultimately the boom collapses...

...If bankers allow the money rate to dip below what businessmen perceive as the return on capital, loan demand will rise...

...Alvin H. Hansen and Herbert Tout charged in 1933 that his analysis was too narrowly drawn...

...Thus, by 1960, the year his massive Constitution of Liberty was published, he could write, "Though I still regard myself as a technical economist, I have come to feel more and more that the answers to many of the pressing social questions of our time are to be found ultimately in the recognition of principles that lie beyond the scope of technical economics or of any single discipline...

...In fact, Hayek went on to say, there are two rates of interest...